Milken 3

America’s Debt – Short Term and Long Term

The latest from the 2014 Milken Global Conference. Just got out of a session on how the U.S. public debt and how it’s affecting economic growth, which was moderated by Fox Business Network anchor Maria Bartiromo. One of the first points that came up was that there was a general weariness in America (both public and political weariness) in debating public debt. As evidence, one of the panelists joked that last year’s panel on the same topic was in a “much bigger room.” Despite the smaller room, the session was packed to the rafters, telling me there was no shortage of interest in the topic among attendees.

An initial point of contention among the panelists was the long-term impact of ballooning public debt on the U.S. economy. One panelist suggested that large mandatory programs with hefty price tags (between the lines, I read “Social Security,” “Medicare,” and “Obamacare”) were actually crowding out discretionary spending in the federal budget – things like basic research and defense. The other concern was that all of these big-ticket items amounted to gigantic fixed costs, and that with those fixed costs locked into place, the United States was left with too little room to respond or at least be flexible.

To get some context, I stepped outside just after the session and placed a call to Robin Anderson, economist with Principal Global Investors. The long-term concerns are valid, she said, but they have to be balanced with the short-term consequences of slowing public spending, and hence, public debt. “During the most recent U.S. recovery, the economy grew at around 2.4%. During that time, private spending was up by 3.4%. That amounts to a 1% drag on economic growth by reducing public spending.” Like it or not, but government spending is a part of the GDP calculation. So the issue is this: how do you carefully slow down public borrowing and public spending in the long term without crippling economic growth in the near term. They didn’t solve the issue in the hour that we had, but everyone agreed that action was needed…and soon.

 

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